Economic growth rates for 2021 and 2022 are being revised upward on a regular basis in especially developed markets who provided an abundance of fiscal stimulus. The IMF now expects world economic growth of 6% for 2021, up from the 5.4% projected during June 2020. It is likely that growth may be even higher in 2021. Although bond yields are still high, it is becoming clearer that central banks in the US, UK and Eurozone will not increase interest rates prematurely. However, vaccinations against COVID-19 are not running smoothly in many parts of the world. Especially emerging markets are in danger of being left behind. This is bound to set the “normalisation” of world trade back a couple of years.
In the US, the preliminary first quarter economic growth estimate came in at 6.4%, in line with expectations. Not surprisingly, growth was driven by consumption expenditure following the stimulus cheques paid out in December and January. Growth for the second quarter may be even higher at 9% following even higher stimulus cheques approved in March. In the meantime, the Federal Reserve continued its dovish stance. In addition, the Federal Reserve Chair Jerome Powell made a plea for employment gains to be broad-based and inclusive. As employment is part of the Federal Reserve’s dual target mandate, it prompted speculation that rate increases might only occur late in 2023 or in 2024. However, personal income and corporate tax increases may come into force earlier, late in 2021 or in 2022.
Countries in Europe are in favour of US Treasury Secretary Janet Yellen’s call for a global corporation minimum tax rate, whereby the largest corporations should pay taxes based on their market share in the countries they operate. The issue, however, is the rate of tax that should be instituted. Should this proposal be accepted, it may end a long “dispute” between the US and European countries on trade and other issues. However, recent surges in COVID-19 infections and subsequent “lockdowns” contributed to the Services Purchasers Managers Index remaining in contractionary territory in March, affecting economic growth prospects. The European Central Bank decided to keep monetary policy very easy.
In the UK vaccinations are picking up speed as almost 50% of the population received the first COVID-19 vaccine. Economic activity continues to accelerate, and growth may be revised upward to beyond 5%. As in the US, the government is contemplating tax increased to finance the debt incurred for purposes of fiscal stimulus. The corporate tax rate is set to increase from the current 19% to 25% in 2023, while bracket creep is projected to be introduced on Personal Income Tax next year.
Producer prices are starting to increase in China on the back of higher oil prices, supply chain disruptions and shortages in a range of products. China’s first-quarter economic growth rate slowed to 0.6% quarter on quarter from 2.4% in the fourth quarter of 2020. Both household income and expenditure slowed, while their savings increased. The central bank may therefore opt to not increase interest rates this year despite increasing inflation pressures. In Japan, more regions were placed under lockdown due to COVID-19 infections spreading at a faster rate.
Economic indicators in South Africa had been mixed in the first quarter of 2021. Over the first two months mining and domestic trade registered continued growth compared to the fourth quarter of 2020, while manufacturing and electricity production contracted. Credit extension to the private sector declined in March on the back of a contraction in the uptake of unsecured credit by corporates. In contrast, a massive international trade surplus of R96.6 billion was recorded in the first quarter of 2021. In addition, preliminary National Treasury statistics revealed that higher tax collections of around R36 billion in the 2020-21 financial year and lower expenditure of R15 billion will reduce the main budget deficit (as estimated in the February budget) by R51 billion. This, coupled with the trade surplus, will be ratings positive. However, a public service strike may be looming, and unions will use the better fiscal performance to argue for higher pay increases.
Courtesy: Multivest Economic Division